Is fast growing solar energy start-up Engensa about to be dimmed by Government subsidy cuts? The two young entrepreneurs behind the company explain how they’re working “day and night” to build a business model that will keep the lights on.
|Challenge||Preparing for a cut in the green energy subsidies that finance its core product|
Two young entrepreneurs who are expecting to achieve sales of £15m in their first full year of trading would normally expect plaudits rather than brickbats. However, university friends Toby Ferenczi, 28, and Toby Darbyshire, 30, accept that their start-up, Engensa, is the subject of suspicion in some quarters.
The company installs solar panels on consumers’ roofs – which would normally cost between £10,000 and £15,000 – for free and then claims back the subsidy, or “feed-in tariff”, that was implemented in April last year to encourage renewable energy production. The popularity of the scheme is helping Engensa achieve monthly revenues of around £1m, and it is adding 10 employees every four weeks to cope with demand.
It expects a pre-tax profit of as much as £2m this year while its revenue target for next year is £35m – but only in the increasingly unlikely event that the subsidies continue at their current level.
If the company’s model is economically valid, why should its sales be subsidised – especially in a time of energy price inflation?
“When you have [energy companies] turning over billions on a [fossil fuel] product that’s increasingly expensive and pushing more of our population towards fuel poverty, one of the antidotes is having green energy companies [doing well],” Darbyshire argues. “We need renewable companies to be doing not just £35m but £100m and £1bn. If we don’t, in 20 years, when the price of fossil fuels has gone up by 200pc or 300pc, we’ll be looking back thinking, ‘£35m didn’t seem much’.”
Engensa is one of a number of installers that have been enjoying a roaring trade thanks to home owners’ sudden enthusiasm for solar; the subsidies can provide returns of as much as 10pc a year and significantly cut electricity bills.
The co-founders complain that the cost of feed-in tariffs to consumers – which is levied through energy bills rather than through taxation – has been vastly overstated. Critics have said that, when combined, green subsidies are adding as much as 15pc to domestic power bills, although Ferenczi, a solar scientist and former GE engineer, says the company’s own research estimates that the cost of feed-in tariffs is around £2.20 per household per year. “For an industry creating jobs and supporting green energy, that’s not a huge price to pay,” he argues.
Based on growth in employment of installation engineers and service workers – most of the panel manufacturing still takes place in China – Engensa also estimates that the industry will create 10,000 more jobs by April. Not everyone agrees with their assessment of the importance of the sector – including, Ferenczi fears, the Government.
Feed-in tariffs are designed to decrease at regular, planned intervals to reflect and encourage the falling cost of renewable energy technology, with the goal being an established industry that can produce cost-effective, green energy without the subsidies.
In April, however, the Government proposed an unexpected cut in the subsidy for large and medium-sized installations. The Department of Energy and Climate Change (DECC) said the surprise cuts would ensure subsidies remained available for the smaller installations the tariffs were originally designed for rather than larger speculators trying to take advantage of it.
Good news for Engensa, then? Not necessarily. Ferenczi says the size justification was “misinformation” from the Government. “The underlying reason was the cap in the size of the feed-in tariff scheme [the Coalition implemented at the comprehensive spending review].” In other words, the popularity of the scheme made it a victim of its own success and the budget was in danger of being used up.
“Having a budget cap is against the fundamental principle of tariffs”, Ferenczi says. “The intention is not that they subsidise a dying industry; it’s a temporary measure to kick-start an industry and get it on its own two feet. Demand shows it’s working.”
Now, he fears homeowners’ enthusiasm for solar might mean a hefty cut to tariffs for domestic installations could also be on the cards – a decision that could prove as stark as “the Government deciding whether they want a solar industry at all”.
Ferenczi has heard rumours that drastic cuts are to be recommended during an imminent consultation.“That would put the industry in jeopardy. It takes away the demand and puts our ability to attract investors to provide the financing for free solar [at risk],” he says. It might only be a consultation document, but he suspects “the numbers they set out will be very hard to change”.
Surprisingly, Ferenczi admits the tariff is “probably” too high at its current level. “We’re just coming up to a [reduction] point, that’s the natural order of things. When it was first introduced, a [regular] reduction of 9pc was envisaged. Now everyone is openly talking about 30pc [and higher].”
The uncertainty makes it a frustrating environment in which to be running a small business, Darbyshire says. “If you say to any business after two years as you grow at breakneck speed, ‘by the way do you mind if we [add] 30pc to your sales cost’, it’s going to be hard. These are big challenges that we’re working day and night to overcome.”
The company is focusing on reducing its costs to make any cuts manageable; its intention is to keep offering free solar but a significant reduction in the tariff would mean a big hit on its margins for new business and renegotiating with its finance provider, venture capital firm Albion Ventures.
The company also sells solar systems to consumers who want to take the tariff themselves as an investment, although its free solar will only look more attractive in light of a subsidy cut, if Engensa can afford the hit. “The [free solar] consumer isn’t focused on the subsidy,” says Ferenczi. “But by being one of the few companies that offers both, we’re in a position to balance the business. We can take a higher margin on one product and lower on another depending on where the tariff goes.”
The subsidies may be controversial, but Darbyshire’s request for policy clarity sounds reasonable: “Decisions need to be made, but the key thing for us and for investors is clarity aver the long-term future. We can shift our business to meet targets, we can innovate. But we can’t respond to an overnight change, a whimsical response because of short-term political expediency. Energy is a 50-year challenge for the UK – the policy frameworks need to be stable and long-term.”